“In preparing for battle, I have always found that plans are useless, but planning is indispensable.”
– Dwight D. Eisenhower
General Eisenhower’s point was that the process of creating a plan provides value because it forces the planner to consider (and make provision for) “What if events don’t proceed as planned?”.
Business planning may be indispensable for a business in this regard, but in this article, we will delve deeper into why business planning’s father, master planning (or exit planning as it is sometimes called), is just as CRITICAL for a business owner … and why it should be done NOW and not in the future.
What really is Master Planning?
Whereas business planning focuses on the outcomes for the business, master planning differs in that it focuses on the outcomes for the business owner.
Master planning is the creation and execution of strategies that align and deliver the business owner’s personal, financial, and business goals. It results in peace of mind and confidence to the owner, knowing that the master planning strategies are not only continuing to grow the value of their business, but also making the business attractive and transferable for the future. The result … the owner can choose to transition or exit from their business in the timeframe they want, for the money they need, and on the terms they desire.
So if you are a business owner who sees personal well-being, financial security, freedom and happiness as high priorities in your life, then master planning should be at the top of your “must-start” projects right now!
Why am I so passionate and confident about the benefits of master planning? Because I’ve personally experienced and seen the results first-hand.
My Personal Experience ...
In 2011, my three business partners and I were asked to take over the management of a business called Propertylink Group Ltd, with the objective to improve its performance and give the existing shareholders of this unlisted entity a “liquidity event” … an event that would allow them to cash in their equity some time in the future.
We made the decision to introduce master planning into the business from Day 1, as we knew it would have an immediate effect. Due to the strategies created from the master planning process, within the space of 5 years, we had transformed Propertylink into a highly valued infrastructure and property investment business. We had increased its value 16X to a valuation of over $500 million when it was listed on the Australian Stock Exchange in 2016.
Now if we had waited to implement master planning, I know these great results would not have been possible.
But if you’re still not convinced about the significance and importance of master planning for you and your business and why you need to start it now, let’s examine three reasons why delaying master planning will probably put your dream business exit into turmoil.
Reason No. 1 - Master Planning Grows Business Value ... Today
Many owners think …
“Master planning only needs to be considered when the business is being prepared for sale. It only focuses on making a business sellable”.
WRONG!
Master planning is not just about making a business sellable in the future; it also is about making a business more valuable TODAY.
Right from the get-go of the process, master planning focuses on getting immediate improvement in the value of the business. It investigates the value performance of a business, identifies where value can be improved, and creates strategies that will improve and enhance this value.
Why is value so important?
Value not only gives a business owner financial wealth, value gives the owner peace of mind and control, knowing they have de-risked the attainment of their business and financial goals. Value is also the benchmark metric for business attractiveness and transferability to acquirers.
So what really is business value?
Business value needs to be seen from different perspectives. From an investor’s perspective (either 3rd party, employees or even a family member who has been gifted equity), value is generally viewed from the amount of risk taken on their investment to achieve target financial and/or outcome metrics.
The less risk for the investor for the same returns or outcomes, the more valuable the business.
Risk covers many aspects. It can relate to issues such as:-
- the confidence levels in future financial performance and cash flow;
- the reliance on key personnel to operate the business;
- the “what-if” situation where major customers no longer purchased from the business or critical suppliers no longer delivered goods or services to the business;
- the deployment of systems to maintain desired business performance;
- external opportunities and threats that may affect the economic, operational, social or environmental performance of the business.
From an owner’s perspective, value may be summed up in 3 categories:-
- Business goals – is the business achieving its mission, vision and purpose?
- Financial goals – does the business deliver financial wealth and value to the owner and their stakeholders? Can this financial wealth be transferred out of the business at the owner’s discretion?
- Personal goals – does the business give the owner their desired lifestyle and opportunity (freedom) to do other important things in life?
Knowing that master planning enhances business value for the owner from many points of view, I ask why would any business owner contemplate delaying the implementation of this life-changing business strategy?
Reason No.2 – Master Planning Prepares Business Owners for Unexpected Events
Peace of mind is a wonderful feeling for any business owner. The feeling of being safe and protected cannot be underestimated. When you add the feeling of control (within one’s means), most business owners would be getting close to a sense of freedom and happiness.
Master planning, done right, will deliver that control and peace of mind to a business owner.
Control and peace of mind over what? … and how?
Let’s answer this by looking at a business owner called Eric (the Engineer). Eric owns Fair Dinkum Aussie Widgets, an engineering business that makes bespoke parts for clients in the construction industry. It has a good profit history in most economic situations and sells a unique patented product for heavy civil engineering equipment. However, the business is quite dependent on Eric for sales and operational acumen, and much of this acumen resides only in Eric’s head.
Eric has heard about master planning and its benefits, but his dream to successfully transition out of his business is still five years away. He now considers two options.
Option 1 – put off master planning until he has more time (he’s too busy sorting out business problems at the moment), or he gets closer to his chosen 5-year exit timeframe; or
Option 2 – commit to starting master planning now
Apart from the probable loss of value growth by not implementing master planning now, what Eric also doesn’t realize is the risk difference between the two options.
Putting off master planning (taking the Option 1 approach) is much riskier for several reasons.
Firstly master planning is designed to address one of the reasons he gives for not planning – spending too much time working in the business, sorting out problems and the like. Being too busy to work on the business is a major problem, so finding a solution for that problem should be a priority of Eric’s.
On top of that, master planning is designed to identify and address other business efficiency and operational issues that Eric hasn’t yet uncovered.
If that’s not enough, master planning will also help make the business more attractive and more ready to be transferred to a new owner at any time.
Notwithstanding those benefits, Eric snubs master planning for now … “I’ll do it later when I have more time and closer to my exit timeframe”, he says.
Eric has now placed himself and Fair Dinkum Aussie Widgets in a position where they are unprepared for two scenarios that occur more frequently than you may think.
Scenario 1 – The Unexpected Offer
Scenario 1 is when an acquirer comes knocking at the door of Fair Dinkum Aussie Widgets.
It’s an opposition business called Acme Engineering that sees Eric’s business as a great strategic fit for the growth of its business. As a strategic acquisition, it’s an ideal situation for Eric’s business to be sold for a high industry value. After Eric provides some high-level financial results to Acme Engineering, they issue a conditional offer that knocks Eric’s socks off. He is over the moon as he sees his predicted wealth increase and his transition timeframe significantly fast-tracked.
He agrees to go into a formal due diligence process.
But that’s when the wheels start to fall off.
Due to the limited operational systems in place within Fair Dinkum Aussie Widgets, the work for Eric and his management to provide all the requested information is both time-consuming and stressful. As time goes on, Acme sees the inner workings of Fair Dinkum Aussie Widgets, and they start to recognize that it may not be as attractive as they first thought. Many issues arise, with the major concerns revolving around key-man and systems risk.
After six weeks of intense due diligence, Acme withdraws its offer. Fair Dinkum Aussie Widgets is too risky and does not have the value they originally thought.
To Acme, it was like being attracted to a unique, shiny car … only to find important engine parts missing after lifting the bonnet.
Eric is both exhausted and shattered. He comes to the realization that his life’s work, and most valuable wealth asset, may not be worth anything at all.
If only Eric had chosen Option 2!
He would have started executing the value enhancement strategies from the master planning process well before Acme had made their unsolicited approach, discovered how to make the business less dependent upon himself and systemised the operations. As his business would have been humming with minimal problems and plenty of financial returns, he may have been confident enough to negotiate an even higher initial offer. And to make the journey more enjoyable, the subsequent due diligence period would have been much easier than his Option 1 experience.
At the end of the day, it would have been a totally different result for Eric. By undertaking master planning as a priority business strategy, he could have exited his business earlier than planned and for a higher business value. Them’s the breaks!
Scenario 2 – The 5 D’s of Despair
It’s a common misconception that owners think they will have total control when they leave their business. Because of this, they don’t contemplate what would happen if they were unexpectedly taken away from their business. Unfortunately, statistics show that 50% of owners are wrong with this mindset because of the unexpected occurrence of one or more of the “5 D’s of Despair being:-
- Death
- Disability
- Divorce
- Disagreement (with business shareholders)
- Distress (financial or mental)
Scenario 2 is when Eric contracts COVID and then develops long COVID. He has no energy to do anything, not even get out of bed and drive to work. He can’t work for five months.
Eric’s disability and absence have been chaos for Fair Dinkum Aussie Widgets. As Eric controlled most of the sales process, the sales figures fell into freefall. Worse still, the manufacturing has been in turmoil because the process was in Eric’s head, and the workers weren’t given any documented process to design and manufacture the bespoke parts. As a result, rejected orders go through the roof, customers leave the business, and Fair Dinkum Aussie Widgets’ reputation is in tatters. Finally, when Eric’s Financial Manager is poached by a competitor, Eric’s wife realizes she has to do something before the business enters a terminal position. Still, she has no idea what to do. To say the situation is stressful for Eric, his wife, and his employees is an understatement.
But it didn’t have to be like this.
As with Scenario 1, if Eric had transformed the business (with master planning) to be less reliant on him as the owner and had systems in place, most of these critical issues would not have occurred. As a result, the business could have survived during his absence without the undue stress on himself, his family and his business.
Delaying the commitment to master planning killed any chance of success for Eric’s business transition dream.
So how many business owners are wise enough to see master planning as a priority business strategy that needs to be implemented ASAP to safeguard their success?
If you go by the statistics, unfortunately, not many.
This is the third reason why master planning should not be fobbed off into the future.
Reason No.3 – Master Planning Addresses Why 95% of Business Owners are Unsuccessful
One of the costliest errors business owners can make is a complacent mindset – “My business is great, and there will be a lot of buyers queuing up for it the moment I feel like selling it.“
However, the reality could not be more different.
The Law of Supply and Demand
I refer you to one of the main economic theories called the “Law of Supply and Demand”. The theory is that prices are determined by the relationship between supply and demand. If the supply of a good or service outstrips it’s demand, prices will fall. If demand exceeds supply, prices will rise. For a business owner with future aspirations to sell their business, due to demographic trends, this law needs to be considered.
There are an estimated 5.5 million Baby Boomers in Australia. If you were born between 1946 and 1964, i.e. aged between 58 and 76 as of 2022, you are a part of this figure. Globally, it is estimated that 40% of small businesses are owned by Baby Boomers. In Australia, Baby Boomers own 55% of the nation’s private wealth.
These Baby Boomers are now looking to retire. In Australia, 2,500 people retire or reach the age of 65 every week (Salt, 2021), whilst 80% of Baby Boomers indicated that they are looking to transition to retirement. This can only mean one thing – there is a multitude of business owners putting their businesses up for sale. As of 2017, there were more than 60,000 businesses listed for sale, which marks an 800% increase in the number of businesses in the market from 2007 to 2017. With the increasing number of Baby Boomers reaching the retirement age of 65 and looking to sell their businesses, this number has increased.
As most of the nation’s wealth is concentrated among the older generations, coupled with the fact that incomes of the younger generations have been on a steady decline since the Financial Crisis in 2008, younger generations who would typically have an interest in purchasing businesses from these older generations are finding themselves hindered by their lack of capacity to do so. This is the main contributing factor to the decrease in demand for businesses that are being sold on the market.
The value of the Australian small business market has been on a steady 11-year downward trend, which points to an unattractive landscape for Baby Boomers to sell their businesses.
While there are many retiring Baby Boomers looking to sell, there is not enough demand in the market to meet supply. The Law of Supply and Demand.
To sell your business for a good price in this market, it needs to stand out from the crowd even more.
Q: How do you do that?
A: Make it attractive and transferable by implementing value enhancement strategies as part of your master planning process.
Why 80% of SMEs DON’T Sell
There have been many studies undertaken all around the world about the success, or lack thereof, of business owners selling their businesses. Australia’s statistics are similar to those in other developed countries … around 80% of small to mid-sized enterprises can’t be sold!
That’s a huge number of owners who never get to liquidate the wealth they thought they had in their biggest asset … their nest egg needed for a comfortable retirement. After decades of hard work and commitment, that is such a soul-destroying statistic for most business owners.
Why don’t they sell?
Two main reasons contribute to this 80% figure.
a). The Ugly Baby
Whilst every parent thinks their baby looks beautiful, not everyone thinks the same. You may think your little darling has a cute nose, whereas others may think the poor kid has seen too many rounds in the ring with Mike Tyson. The list could go on. Whilst it may not be said directly to a parent’s face, some see the baby in the ‘ugly’ category. If the parents knew, they would be horrified. “How can anyone see our beautiful pride and joy as ugly? That’s incomprehensible.”
The same situation can happen to business owners. They think their business would be attractive to any investor, especially after the time, money and effort they’ve put in over many years. These business owners have developed what I call the Ugly Baby Syndrome. They think their business is attractive, but in reality, to investors, it’s ugly.
When reviewing a business, prospective buyers consider many factors that give them confidence in the transferability and real value of the business. The higher the confidence (i.e. less risk), the more attractive. The lower the confidence (i.e. more risk), the less attractive.
So when a business broker or M&A specialist is asked to have a look and provide an indicative valuation for a business, they initially ask themselves the question … “Is the business attractive and transferable enough to be sold?” For about 70% of SMEs, the answer is no. These businesses don’t even get the chance to be taken to market. The brokers and M&A specialists don’t want to waste their own time (and reputation) parading an ugly baby into a competitive beauty contest.
Many business owners do not consider the key drivers that make a business valuable. Good master planning overcomes this issue by focusing on eight key drivers of business value, making the business attractive and transferable.
No more ugly baby.
b). Market Value vs Owner’s Perceived Value
Let’s assume the business is now relatively attractive and transferable, and there are prospective buyers interested in the business. Does that mean the business will now sell?
The answer is – it depends. We now must ask the next question: – “Does the business owner agree to the price?”
In other words, does the business owner agree with the market value placed on the business by the prospective purchasers, or does the business owner have a higher price in mind for the business value?
Business owners may find it hard to separate the financial value of the business from the sentimental value it holds to them. Business owners, in their impartial state, often make the mistake of not using proper valuation metrics and calculations. This leads to a disparity with the actual, objective market value of the business. This disparity accounts for approximately the other 10% of SMEs that don’t sell – buyer and seller can’t agree on the price.
Master planning overcomes this issue by getting the owner to understand the real market value of their business today (by using valuation metrics and calculations), and then they learn how to increase this value to their financial target. But that is only the start.
To enable your business wealth to be realised, your business must be prized enough by acquirers to get them to part with their money.
There are many aspects to consider to get the business to that stage, many of which take years to plan and implement appropriately. It is, therefore, of utmost importance that if the business owner wants to realise their business wealth, they must commence addressing these factors as early as possible.
How? … by starting master planning today.
So if that accounts for 80% of owners who don’t sell, what happens to the remaining 20%?
The Business Owner’s Regrets
Surveys conducted one year after a business sale show a vast three-quarter (75%) of the remaining 20% of business owners profoundly regret their decision to sell (Exit Planning Institute, 2013 & 2016).
That is not a good outlook at all.
So what are the two main reasons for this profound regret?
1. Insufficient Funds
Owners are often regretful because the net funds they received from the business sale and subsequent investments do not support the desired lifestyle they dreamed of.
They generally have done one, or both, of these issues …
• Based their financial planning on the gross proceeds of the business, forgetting that many expenses and taxation considerations need to be deducted from the sale price. Tax can be a big issue, especially if the owner has not received advice on the tax laws associated with their business structure before the sale process commences; or
• They have miscalculated their investment strategies and receive less income for the nominated capital amount invested and/or drawn upon.
So when faced with insufficient funds, the owner has two options. Either;
a) change their lifestyle and scale back on their various needs and wants, harbouring hope that they will be satisfied despite having less and being able to do less; or
b) for the business owner to emerge from retirement to take on a part-time job or try to start a new business, especially if they have the physical means and bodily strength to do so
None of these options is desirable. As a result, business owners often experience deep regret and subsequent resentment after selling their businesses, as they find that their new lifestyle is not one they had dreamed of when they cashed out.
2. What’s Next?
After years of focusing on their business (including an intense sales process), many business owners fail to consider the personal side of business transition … their future life. They have been too busy focusing on growing business value, being financially rewarded and then harvesting that value. But at some point, they must confront the question … “Well, what comes next?” For many, the answer is “Nothing!”
Many business owners have their sense of identity built into their business. The business is akin to their child. Giving their business up and selling it for money may seem like a great idea when considering the financial benefits, but eventually, reality kicks in that they have lost a sense of who they are.
Besides their identity, many business owners also report losing their sense of purpose in life. After a drastic shift from being constantly busy every day, they often face apathy because they don’t have any fulfilling work.
Post-sale, business owners often report boredom and lethargy. In their old business, they were constantly busy, whereas, after the sale, they find that no matter how much they enjoy playing golf or going on holidays, there is still spare time to be filled during the week. Having worked constantly for most of their life, they now find it difficult to slow down. Most business owners, especially those who have not planned well in advance for the sale, struggle to fill this spare time with new and exciting activities. With nothing to do, they become bored with life. They regret they sold their business.
But all these regrets could have been avoided if they had undertaken master planning.
Done professionally, transition planning addresses the financial and personal goals of the owner well before unresolvable issues arise. Gaps in achieving these goals are identified in the process, and strategies are created to close the gaps. No more surprises, no more shocks. The business owner becomes prepared, ready, and excited for the transition. No more regrets.
Where to from here? ... Make Time Your Friend
So how do you become part of the 5% of business owners who end up happy with their exit outcome, or conversely, how do you avoid being in the 95% of owners who are not successfully achieving their exit dreams?
The answer is simple and comes in two parts …
- Implement master planning; and
- Start now, not in the future
Many of the issues discovered during the discovery phase of master planning can take time to resolve. That’s why you are doing yourself a disservice by delaying the start of the process … you need time to be your friend, not your enemy.
It took my business partners and me 5 years to transform our business. Every minute of that time spent implementing the strategies from our master planning process made the business more valuable.
When all is said and done, our proactivity in implementing master planning from Day 1 delivered our shareholders (and us) outstanding financial returns with no business remorse or personal regrets.
How to Beat the Odds
There are many risks and pitfalls to cashing in what is probably the biggest wealth asset in your portfolio, your business. These risks include: –
- Demographics causing a supply/demand change that results in lower business values
- A 50% chance your business will be forced to sell in a timeframe that is not of your choosing with unsatisfactory results that don’t provide for you or the people you care about; and
- An 80% chance that even if you did want to sell, it won’t; and
- A 75% chance that if you did sell, you would profoundly regret it!
With those doom and gloom statistics hanging over your head, how do you beat them, enhance, and then harvest the maximum value for your life’s work so you can live happily ever after?
The answer is Master Planning, and for your own peace of mind, the sooner you start it the better!
The information contained in this article is general in nature and is not legal, tax or financial advice. Contact a lawyer or a tax or financial professional for information regarding your particular situation. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. Clients should consult their legal, accounting, tax or financial professional in specific cases. This article is not intended to give advice or represent our firm as qualified to advise on all areas of professional services. Master Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice you need.
Any examples provided are for illustrative purposes only. Examples may include fictitious names and may not represent any particular person or entity.
